Associated Indem. Corp. v. Dow Chemical Co.

• Decision Date: 11 June 1991
• Docket Number: 90-1380,Nos. 90-1338,s. 90-1338
• Citation: 935 F.2d 800
• Parties: ASSOCIATED INDEMNITY CORPORATION, Plaintiff-Appellant, Cross-Appellee, v. The DOW CHEMICAL COMPANY, Defendant-Appellee, Cross-Appellant.
• Court: U.S. Court of Appeals — Sixth Circuit

Page 800

935 F.2d 800

ASSOCIATED INDEMNITY CORPORATION, Plaintiff-Appellant, Cross-Appellee, v. The DOW CHEMICAL COMPANY, Defendant-Appellee, Cross-Appellant.

Nos. 90-1338, 90-1380.

United States Court of Appeals Sixth Circuit.

Argued Feb. 7, 1991.

Decided June 11, 1991.

Glenn F. Doyle, Smith & Brooker, Bay City, Mich., Irving C. Faber (argued), Gary M. Elden, Andrew Butz, Grippo & Elden, Chicago, Ill., for plaintiff-appellant cross-appellee.

Joseph L. Falik, Detroit, Mich., Michael P. Foradas, David M. Elston, Samuel A. Haubold (argued), Kirkland & Ellis, Chicago, Ill., Samuel P. Jordan, Jr., The Dow Chemical Co., Legal Dept., Midland, Mich., William J. Gillett, Dykhouse, Wise & Marsac, P.C., Detroit, Mich., John S. Ingold, The Dow Chemical Co., Midland, Mich., for defendant-appellee cross-appellant.

Before JONES and NELSON, Circuit Judges, and MILES, Senior District Judge ^*.

MILES, Senior District Judge.

An unusual insurance contract provided that Associated Indemnity Corporation ("Fireman's Fund") ¹ would reinstate insurance coverage for the Dow Chemical Company ("Dow") when Fireman's Fund's indemnity payments reached the original limit of coverage under the contract. The contract further provided that the premium for such reinstatement would be determined at the time of reinstatement. The trial judge determined the amount of that reinstatement premium, and both Fireman's Fund and Dow appeal, Fireman's Fund arguing that the premium should be higher, and Dow arguing that the premium should be lower. Furthermore, the trial judge failed to award pre-suit interest, and Fireman's Fund argues that his failure was error. We AFFIRM.

I.

Fireman's Fund issued an insurance policy to Dow that obligated Fireman's Fund to indemnify Dow for losses attributable to the period from July 30, 1970 to January 1, 1974. This 1970 policy limited Fireman's Fund's liability for general liability losses to $2.5 million per occurrence, and it limited Fireman's Fund's aggregate liability for such losses to $2.5 million per category of loss, per year. The policy enumerated five categories of general liability losses, consisting of one category of losses from personal injuries, and four categories of losses from various kinds of property damage. General liability losses did not include losses related to automobiles.

The premium for general liability losses for 1973, the year in dispute, was $893,145, and the premium for automobile-related losses for that year was $170,123. The sum of those two premiums is $1,063,268, and the parties have referred to that sum as the fixed cost premium.

The 1970 policy obligated Fireman's Fund to continue to indemnify Dow for losses in a category even after Fireman's Fund had paid its aggregate liability for that category, but the policy also provided that Fireman's Fund was entitled to an extra premium for doing so. Endorsement No. 25, the crux of this lawsuit, reads:

It is agreed that:

In the event that the aggregate limit of liability is exhausted during any annual period the full limits of liability shall be immediately reinstated. The premium shall be determined at the time of reinstatement.

Circumstances eventually forced the parties to come to grips with that endorsement. In 1981, Fireman's Fund indemnified Dow for a loss attributable to 1973. Its payment to Dow, when added to previous payments, exceeded the aggregate limit of liability for a category of loss. Therefore, Fireman's Fund was obligated to continue indemnifying Dow for such losses, but Dow was obligated to pay Fireman's Fund a reinstatement premium.

However, high stakes prevented the parties from agreeing on the amount of that premium. At the time of reinstatement, Dow faced additional losses in the reinstated category that were fairly certain and that were potentially attributable to 1973. The potential losses were so large that Fireman's Fund's payment of them would certainly exhaust the reinstated aggregate. Therefore, Fireman's Fund demanded a premium of $3.575 million for reinstatement. Fireman's Fund sought compensation for the indemnity payments that it would make under the new aggregate, $2.5 million, for the costs it would incur defending Dow as required by the policy, and for costs of administrating the policy. Furthermore it sought a small profit. Dow refused to pay such an amount, and it claimed that the premium should be some portion of the fixed cost premium for 1973. Fireman's Fund brought suit, seeking a declaration that the policy required Dow to pay Fireman's Fund the premium that it demanded. Dow argued that the policy required it to pay only 25% of the fixed cost premium for 1973: $265,817. The trial judge found that the reinstatement endorsement was ambiguous, so he reviewed the extrinsic evidence to determine the following intentions of the parties.

First, Dow was to have "true insurance;" that is, the risk of losses exceeding the aggregate was to pass to Fireman's Fund at the inception of "the policy year," 1973.

Second, since the risk of loss passed at the inception of 1973, the premium could not be based upon the risk of loss at the time of reinstatement, and could not exceed the fixed cost premium for 1973.

Third, the parties were to negotiate the amount of the premium rather than resort to a previously determined formula.

Finally, the premium was to be commercially reasonable.

The trial judge then declared a commercially reasonable reinstatement premium to be 50% of the general liability premium for 1973 and ordered Dow to pay Fireman's Fund that amount: $446,572.50, and pre-judgment and post-judgment interest.

II.

Fireman's Fund argues that both the plain meaning of the endorsement and the relevant extrinsic evidence require Dow to pay a premium that is commercially reasonable in light of the risk at the time of reinstatement, a risk based upon facts like the high probability of additional losses attributable to 1973. It does not argue that the plain meaning of the endorsement and the extrinsic evidence demonstrate that the parties never arrived at an agreement certain enough for enforcement. ²

A.

The endorsement does not clearly mean that Fireman's Fund would consider the risk at reinstatement to determine the premium. The endorsement clearly indicates only when the reinstatement premium is to be determined; it does not clearly indicate how. Fireman's Fund's analogy of the endorsement to U.C.C. Sec. 2-305 (1978) is inappropriate. Section 2-305 provides that when parties to a contract for the sale of goods have not agreed upon a price, "the price is a reasonable price at the time of delivery." The plain meaning of that language is that the price for goods should be determined upon consideration of circumstances at the time of delivery. However, that language presents a standard, a "price," described in terms of time, "reasonable [at] delivery." In contrast, the endorsement presents no standard, so the reference to time is not for the purpose of describing such a standard.

Fireman's Fund also argues that prohibiting it from considering the risk at reinstatement renders part of the endorsement without purpose. If the premium were to be based upon the risk at the inception of the policy, why could the parties not determine that premium at that time? Why did the endorsement require them to wait until reinstatement? The Michigan Supreme Court, in Associated Truck Lines v. Baer, 346 Mich. 106, 110, 77 N.W.2d 384 (1956), has rejected an interpretation of a contract that "render[ed] [a] provision meaningless and without purpose." However, prohibiting consideration of the risk at reinstatement does not render part of the endorsement without purpose because another reasonably likely purpose can be ascribed to that part. The parties may have intended merely to emphasize that the premium was not due unless reinstatement actually occurred, and to postpone negotiations that might not have become necessary.

B.

Given the ambiguity of the endorsement as presented to the trial judge, he properly turned to extrinsic evidence to determine the intent of the parties. See Ford Motor Co. v. Northbrook Ins. Co., 838 F.2d 829 (6th Cir.1988) (citing Goodwin v. Coe Pontiac, Inc., 392 Mich. 195, 220 N.W.2d 664, on reh., 392 Mich. 195, 224 N.W.2d 53 (1974)); William C. Roney & Co. v. Federal Ins. Co., 674 F.2d 587 (6th Cir.1982) (citing Fox v. Detroit Trust Co., 285 Mich. 669, 281 N.W. 399 (1938)). To prevail at trial, Fireman's Fund had to prove by a preponderance of that extrinsic evidence that the parties intended the reinstatement premium to reflect the risk at reinstatement. The court in Lambert v. Jim Causley Pontiac, Inc., 47 Mich.App. 620, 621-22, 209 N.W.2d 619 (1973) (citing People v. Swineford, 77 Mich. 573, 43 N.W. 929 (1889)), noted the "historical precedent that the plaintiff has the burden of proving [to a preponderance of the evidence] the existence of the contract and his entitlement to benefits thereunder." As held by the court in Mount Ida School for Girls v. Rood, 253 Mich. 482, 235 N.W. 227 (1931), that burden of proving entitlement to benefits includes the burden of proving the extent of those benefits. The standard of review here, on the other hand, is whether the trial judge committed clear error when he found that Fireman's Fund had not carried that burden. Fed.R.Civ.P. 52. We find no clear error.

No credible witness testified that the parties expressly agreed to the risk that the premium would reflect. However, evidence at least as persuasive as that supporting Fireman's Fund's claim supports the trial judge's contrary finding that the parties intended the premium to reflect only the risk at the start of 1973. First, the trial judge found that the parties intended reinstatement to substitute for excess drop-down insurance. Provided under excess policies, such insurance is for losses exceeding aggregate limitations in primary policies. At the time of negotiations with Fireman's Fund...